The euro zone labour market's exceptional resilience is unlikely to last as the one-off factors driving its strength are waning, although there is also no dramatic weakening on the horizon, European Central Bank research showed on Monday.
Unemployment is at a record low 6.3% as firms continue to hire, a puzzle to some since the bloc's economy has been stagnating for the past year and historical precedent would suggest growing labour market weakness in such an environment.
Employment typically expands at about half the rate of real GDP growth but it has actually surpassed GDP growth since 2022, the ECB said.
"The euro area labour market’s performance has been exceptional as compared with changes in output," the ECB said in an Economic Bulletin article. "Rising profit margins enabled firms to retain their workers for longer than usual, despite falling revenues."
But real wages are now rising and catching up to historical trends while energy prices, a key input in costs, are stabilizing, reducing the disconnect between output and employment.
Labour hoarding peaked in the third quarter of 2022 and firms' ability to or willingness to hang onto their workers is now slowly diminishing, the ECB said.
"The euro area labour market is expected to return closer to its historical correlation with output," the ECB said.
However, there is also no dramatic weakness ahead, the ECB argued.
Some policymakers have been fearing a quick erosion in the labour market, which could reduce disposable incomes, weaken demand and lower inflation far more than the bank now predicts.
However, the ECB's study does not appear to back those fears.
"The unemployment rate is expected to remain low over the coming quarters," it said. "Overall, survey data suggest a relatively stable labour market looking ahead."
